The recent weakness in Gold and gold mining stocks is not over. In fact, we are worried about another leg down getting underway.
If that comes to pass, we are positioned to profit from it. But I digress.
Long-term oriented investors and speculators should be aware of the near-term trends but they should also be aware of the conditions that will lead to a shift from a bear market to a bull market.
Here, we focus on five factors that precede major bottoms in precious metals.
Gold Outperforms the Stock Market
Other than in 1985 through 1987, there has never been a real bull market in Gold without it outperforming the stock market. A weak stock market usually coincides with conditions that are favorable for precious metals. That’s either high inflation or economic weakness that induces policy that is usually bullish for precious metals. The 2016-2017 period failed to be a bull market because the equity market continued to outperform Gold. Note that the Gold to Stocks ratio bottomed prior to the 2001 and 2008 bottoms.
Gold & Gold vs. Stock Market
Gold Outperforms Foreign Currencies
Gold outperforming foreign currencies is important because this usually happens while the US Dollar remains in an uptrend. It signals relative strength in Gold and shows that Gold is not being held hostage by the strong dollar. It also can signal a coming peak in the dollar. Gold was outperforming foreign currencies prior to the 2001, 2008 and late 2015 bottoms. There are currently no positive divergences in place.
Gold & Gold vs. Foreign Currencies
Major Peak in the US Dollar
This does not precede bottoms in Gold as it typically is a lagging indicator. But a list of “4” things does not carry the same weight as five. Anyway, Gold is not going to embark on a major, long-lasting bull market without a corresponding peak in the US Dollar. Sure, they can rise at the same time and for months on end. However, it’s difficult to imagine a multi-year bull market in Gold without a corresponding peak in the dollar. Peaks in 1993 and 2016 led to brief runs in Gold but those were nothing like the 1985 and 2001 peaks.
